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Is General Electric 1 Step Closer to Its Ambitious Target?

As another year passes, General Electric edges closer to being more of an industrial conglomerate than a financial corporation.

During the 2008-2009 financial crisis, General Electric's (NYSE:GE) stock crashed, its top and bottom lines plunged, and its dividends were cut drastically. To restrict GE's vulnerability to such financial shocks in the future, CEO Jeff Immelt has been on a mission to strengthen the company's industrial roots and reduce dependence on its finance unit, GE Capital.

He has set some ambitious targets: to earn more than 75% of operating earnings from the industrial business and less than 25% from the finance arm by 2016. With the wraps now off the last quarter of 2014, let's see how close GE is to its target.

Moving ahead with the strategic reshuffling of its portfolio

The declining proportion of GE Capital segment profit on total segment profit. Source: General Electric.

As the chart shows, with every passing quarter, GE's transition is getting more pronounced. GE is doing this through acquisitions, spinoffs, and divestitures, and 2014 was a busy year in this respect.

The company announced the acquisition of Alstom's power-and-grid assets, and is on track to close the deal in 2015. Power and water is GE's largest industrial business, wherein it makes gas turbines, gas engines, nuclear reactors, and provides water treatment solutions and more. Alstom will make GE more competitive in combined-cycle plants -- the combination of gas and steam plants. That's expected to drive future demand and give the conglomerate a big push toward its objective of promoting its industrial businesses.

In September, GE announced the sale of its appliance unit to Electrolux for $3.3 billion. This is in line with the company's aim of closing non-core segments and directing efforts toward the infrastructure business -- such as in power, oil, and aviation -- which brings wider margins.

The divestiture of its consumer finance arm, Synchrony Financial, is another step toward trimming the scale of the financial business. The company shed 15% of its stake in the retail banker through an initial public offering in 2014, and plans to divest the remaining stake this year. After the spinoff, the conglomerate wants GE Capital to focus on lending to midsize organizations and sectors in which it is well-versed, such as energy and aviation.

The company also concluded the sale of GE Money Bank AB (Nordics) to Santander Consumer Finance S.A. for around $953 million in November. It's now contemplating divesting its 89% stake in Polish Bank BPH SA.

GE has created a solid industrial portfolio in which each of its six core businesses is profitable. As seen from the chart below, in 2014, margins expanded in four out of the six segments. Apart from energy management (EM), all other segments have earned double-digit returns, and there are three business lines that have around 20% margins.

There is good demand for the company's products and services in most business lines. In 2014, GE clinched 105 new orders for gas turbines compared with 124 in 2013. The decline was due to the absence of a single Algerian order that had boosted numbers in 2013.

The aviation segment, which makes airplane engines and parts, witnessed 8% order growth during the year. The company's revolutionary LEAP engines, which use the latest additive manufacturing technology, are rapidly gaining market share. According to GE's estimates, the LEAP engine has had a 79% win rate on narrowbody aircraft since its launch.

The transportation segment, which builds locomotives, saw record order levels, up 89% from the previous year, valued at $9.6 billion.

However, GE's journey to focus on the industrial business is not without bumps. In the last quarter of 2014, oil and gas faced macroeconomic headwinds as crude oil prices halved to below $50 a barrel. Orders got affected, and came in at $4.9 billion, 10% lower than the year-ago level. Altogether, GE ended 2014 with a record backlog worth $261 billion.

Through acquisitions and divestitures, the company has built a portfolio of profitable infrastructure business lines that are all contributing to GE's objective. The conglomerate has exited 2014 with the finance arm's profit contribution going further down, to 28% from 33% in 2013.

WIth one more year to go, GE's repositioning plan is well on track. The record backlog levels can give investors confidence that GE will sail through even if oil and gas creates some disruptions.

Author

ICRA Online provides data, research, and analytics solutions. Our research team of accountants, management graduates, and media specialists, does in-depth company analyses, going beyond news, and diving deep into numbers. We write on industrial sectors like automotive, aerospace, and machinery, making it our business to take a 360 degree view of every company we cover.